Electronic tax balance sheets – BARS is Ready

The E-Bilanz is mandatory to use in Germany since this year

"E-Bilanz" is the German nickname for the process by which companies submit their annual financial statements electronically to the tax authorities in Germany.

All reporting entities in Germany now have to follow this process. §5b of the German Income Tax Act (EStG) stipulates that all financial statements for financial years beginning after 31 December 2011 must be sent by "data transmission".

Due to technical and organisational problems, there were still a number of exemptions granted for the 2012 fiscal year, but the Finance Ministry is no longer granting exemptions starting with the 2013 business year. The tax authorities in Germany are now only accepting balance sheets filed electronically in XBRL format.

The German E-Bilanz project got its start in 2008

The switch to electronic tax balance sheets dates back to 2008, when the Tax Bureaucracy Reduction Act (StBürokrAbbauG) was passed on 20 December of that year. The law seeks to simplify a number of processes relating to German taxation procedures fundamentally by cutting red tape. The law made a number of changes, not only to the submission of annual statements but also to procedures related to the collection of trade tax, VAT, corporate tax and income tax. The required processes are to be automated and implemented with up-to-date technologies.

The Finance Ministry decided early on to require tax balance sheets to be submitted in the internationally recognised XBRL format. A task force chaired by the Bavarian State Tax Office was set up to coordinate the requirements of trade associations, companies and government agencies related to the implementation of the law. The task force worked very closely from the beginning with XBRL Deutschland, the organisation responsible for standardising XBRL in Germany. The project went about defining the XBRL taxonomy to be used for the tax balance sheets, published on 27 June 2013 by the Finance Ministry as "E-Bilanz Taxonomie, Version 5.2". In addition, a website (www.esteuer.de) has been created where all the important information about the E-Bilanz project is published and will be continuously updated.

BARS is ready for E-Bilanz

S&N AG, as a long standing member XBRL Deutschland, has been a part of this process from the beginning. The selection of XBRL as the technical basis for electronic tax balance sheets was the right decision. This format is an established standard for the preparation of financial statements and has been used by S&N in a variety of German and international projects to automate the processing of financial information.

The BARS balance sheet analysis system was designed from the beginning to import financial statements in XBRL format. Since 2008, various BARS installations have been using the format to read balance sheets electronically without requiring any manual data entry. Each year, several tens of thousands of balance sheets are imported into BARS this way.

E-Bilanz is thus an exciting project for our BARS customers. Technologically speaking, BARS is prepared to process electronic balance sheets right away. The challenges are more organisational in nature.

The E-Bilanz project only affects tax balance sheets, i.e. those annual statements that must be submitted as part of tax returns submitted to the tax authorities. BARS was designed for lending and credit analysis services and thus works with commercial balance sheets, which are designed to give shareholders information about the economic situation of a company. In cooperation with various BARS customers, S&N is currently reviewing the extent to which a tax balance sheet can also be used as part of financial statement analysis and what special aspects need to be considered.

The BARS vision for electronic balance sheets

Now that E-Bilanz has become mandatory, almost all companies in Germany will produce their tax balance sheets electronically. They will then have a data set on hand that contains all the information needed to calculate their tax liabilities.

The format of this data set, the "XBRL taxonomy", has been clearly and publicly documented. The information it contains can be fully identified and classified. When else would be a better time to retire the existing method of collecting balance sheet information, where the company submits its annual report on paper and the bank then enters it into the system manually?

Companies can now send their annual financial statements to the bank in XBRL format and manual data entry will no longer be needed. The data would be directly imported into BARS and always classified correctly. A variety of errors that can occur during manual data entry, ranging from simple typos to fully misclassified data, would no longer be possible. The bank's data quality will correspond exactly to the data reported by the company.

In addition to this improvement in data quality, this will also result in huge savings. It not only eliminates the time-consuming manual data entry by highly skilled and thus well-paid professionals, but also replaces the logistics required by submitting statements on paper, starting from delivery of the financial statements to analysts, on to the actual processing of the documents and then timely archiving. This results in a potential savings comparable to that achieved with the conversion from paper-based payments to paperless processes.

Scenarios for the future

Accepting financial statements in electronic format reduces costs compared to a manual data entry of balance sheets so dramatically that a number of other scenarios become possible that could not be previously considered for economic reasons. Here are just a few examples. S&N assumes that there will be a variety of other models that will enable XBRL in the coming years.

Meaningful peer-group comparisons

BARS offer major customers peer-group comparisons where they can compare one client with its most important competitors. For example, someone analysing the financial statements of Scania would welcome the opportunity to compare it side-by-side with the corresponding statements from MAN, Renault Trucks and Mercedes Benz. If these companies are also customers of the bank, the data is often already available. Otherwise, it would be a time-consuming process to obtain it and then enter it in manually. With appropriate access to the electronic tax balance sheets, such peer group comparisons will be possible in the future with just a click of a mouse.

Tax balance sheet ≠ commercial balance sheet

Under the German tax code, there are two types of annual financial statements: the commercial balance sheet and the tax balance sheet. While both statements describe the same content – a company's growth in the past financial year – they are aimed at very different audiences.

The commercial balance sheet is used by companies to inform not only its shareholders and investors, but also and especially banks, about the success of the company. The goal is to represent the company's performance positively in order to remain attractive to investors and to obtain a positive rating from banks. Such a rating is directly reflected in being able to obtain favourable interest rates.

The tax balance sheet is prepared only for a single audience: the tax office. This statement is used to calculate the company's tax liability. The tax balance sheet therefore usually exploits every loophole available to keep the tax burden as low as possible.

Banks perform balance sheet analysis almost exclusively based on the commercial balance sheet. The banks are therefore considering the effects on their analytical processes if they switch to analysing the tax balance sheets in the future. Eventually, new metrics would have to be used for credit analysis. Adaptations to existing rating methods are possible.

How the bank gets the balance sheet

In contrast to the commercial balance sheet that is submitted to the commercial register and possibly also published on the company's website, the tax balance sheet is not public. In the past, it would be drafted by the tax consultant, accepted by the auditor and then submitted to the tax office. How a credit institution wishing to use this information might obtain access to it has yet to be clarified. There are various available options to transmit the data. S&N is currently working with existing customers on some initial concepts that take into account the needs for secure data transmission as well as the existing regulatory requirements.

You're not getting your hands on my data

Much more important and more difficult than pure technology will be convincing those companies creating electronic tax balance sheets of the new method's advantages. This will allow the bank to make quick comparisons with transparent companies that can be done with a simple click of the mouse.

In addition, there is an imbalance between the costs (for the customer) and the benefits (for the bank). The banks have to offer its customers sufficient incentive to make their data available electronically. For example, the bank, especially it uses BARS, could offer its customers an industry-comparison report. This would allow companies to identify those areas where they are better positioned than their competitors and where they might have some catching up to do. Also offering customers a credit report that gives them some insight into how the bank views them could increase their willingness to submit documents electronically.

If you are interested in discussing what can be possible with BARS and electronic tax balance sheets, please contact: